Analyzing Sequenom's Offer for EXACT Sciences (EXAS, rated BUY)
Analyzing Sequenom's Offer for EXACT Sciences Since I profiled EXACT Sciences (EXAS) in late December as part of the ETF Innovators Emerging Diagnostics Index , EXAS announced that its stool-based DNA [sDNA] screening test was added to the colorectal cancer screening options in 12 more states + Washington DC and the Company received an unsolicited, all-stock buyout offer from Sequenom (SQNM) after the market close on Friday, which is valued at $41M or $1.50 per share. It has not been an easy ride for EXAS since I first wrote about the Company in October 2007, but the unsolicited bid by SQNM highlights the underlying value drivers at EXAS, which are not adequately reflected in the all-stock, $41M offer: 1.) a portfolio of intellectual property in non-invasive prenatal diagnostics, non-invasive colorectal, and aero-digestive cancer screening 2.) the American Cancer Society [ACS] endorsement of sDNA testing, leading to wider acceptance of sDNA testing as an option for colorectal cancer screening by states and major insurers such as Cigna (CI) 3.) the commercial launch of ColoSure by LabCorp (LH) 4.) EXAS has long-standing relationships with scientific pioneers at Johns Hopkins University, Case Western Reserve University, and other leading medical institutions – with the latter launching a pilot program for sDNA screening at two sites which will feature the test as the preferred option for those who are unwilling or unable to obtain a colonoscopy. Investors should also note that SQNM traded as a penny stock not so long ago, including most of the time period between August 2004-October 2006 before enacting a 1:3 reverse split in June 2006 to maintain its Nasdaq listing. The reverse split proved effective for SQNM and the stock price began an exponential ascent later that year and now trades in the low twenties for a market cap of $1.3B, compared to EXAS which is now trading above the $1.50 offer at a market cap of just $42M during intraday trading today. The hostile bid by SQNM represents a new support level for shares of EXAS around $1.50, well above the penny stock levels of late last year when things appeared bleak for the Company's future and the overall stock market. While SQNM states the bid for EXAS is focused on expanding into cancer diagnostics; EXAS also holds patents in the area of prenatal diagnostics, which are not fairly valued in the $41M offer by SQNM for the entire company. I think the unsolicited bid by SQNM represents the beginning of offers for EXAS, which could involve licensing deals for the prenatal diagnostics IP and bring in a cash windfall of $20M-$30M + milestone and royalty payments. Such a deal would be similar to the $30M previously received from LabCorp (LH) to develop the sDNA colorectal cancer test as a "homebrew" version without going through the FDA approval process. EXAS is clearly in need of a major cash infusion and management overhaul to revitalize the Company, which has struggled despite the ACS endorsement of sDNA for colorectal cancer screening. The bid by SQNM brings attention to EXACT's prenatal diagnostic IP and hastens the process of licensing deals for this valuable patent estate. Prenatal diagnostics are key to the future of SQNM, which will announce clinical trial results at the end of the month for SeQureDx, a non-invasive screening test for Down syndrome that the Company hopes to launch later this year.